News

Public Bank has fixed the issue price of its proposed rights issue at RM13.80 on the basis of 1-for-10.

Issue price is at 33% discount to the theoretical ex-rights of RM20.64 based on 5-day VWAP of RM21.32.

This will involve issue of 350.2m new shares, raising RM4.83bn.

Financial impact

The actual issuance price and entitlement ratio is largely in line with our previous guestimate of RM14.20 and ratio of 1- for-10, respectively.

CET1 of 8.5% as at Mar 14 will improve by 160bps to circa 10.1%, closer to peers.

Book value will increase by circa 7%.

However, EPS will be diluted by about 5.5% while average ROE will be eroded by 160bps to 18.6%.

Pros / Cons

We maintained our neutral to slightly positive stance about the rights issue.

Despite the ROE and EPS dilutions, its capital ratio (which is among lowest vis-à-vis peers) will be boosted to a level that is comparable to peers.

More importantly, it will eliminate uncertainties about the timing of a cash call and its capital position.

We also believe that this is an opportune time to undertake such exercise given that its share price is riding high which will help to minimize the EPS dilution impact.

However, given that current share price has already largely reflect its fundamentals while our ex-rights target price will be adjusted lower (for both adjustments to share price and ROE), we still prefer Maybank, RHB Cap and AFG for exposure to the banking sector.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and higher than expected erosion in NIM.

Forecasts

Unchanged pending completion of the rights issue.

Rating

HOLD

Positives:

• Above industry asset quality and ROE;
• Excellent track record in delivering guidance and consistency in growth.

Negatives:

• Dividend payout ratio lower than previous years and uncertainty about quantum of counter cyclical buffer.

Valuation

Maintain target price at RM19.08 based on Gordon Growth with ROE of 20% and WACC of 8.8.

Ex-rights, target price will be adjusted to RM18.32 given adjustments to both share price and ROE (which will adversely impact our Gordon Growth valuation methodology).

Source:Hong Leong Investment Bank Research - 9 Jun 2014